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Is WPI the true reflection of inflation
Sensitivity of data of inflation is now fully understood when millions of investors lost billions of rupees in stock market crash. Time has come when Indian government should value the benefit of CPI vis-���-vis WPI.
 
Tue, Jun 24, 2008 12:41:12 IST
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GETTING UP every morning to listen to the new announcements on inflation figures by the government has almost become a practice for us. On Friday, before noon, inflation figures are announced and thanks to the media and Internet that the information on rate of inflation spreads like a panic attack among employees in the offices. Gossip at the lunch table are now-a-days concentrated in and around inflation. Suddenly, we have become more serious about our economy (rather about our purse). The Office of the Economic Advisor (OEA), ministry of industries compile the Wholesale Price Index (WPI) numbers for all-India, on weekly basis.

And since quite a few months, our week ends while listening the sour figures of inflation and people are forced to obey some austerity measures, cut their eating out and shopping. Week back, shop owners were complaining about Indian Premier League (IPL) that due to these matches, people postponed their purchases and now shop owners may blame loose inflation, which is forcing the people to be indoor and watch TV, curtail their shopping and dinning out. It was told that during high inflation, it is better to curtail your expenses as better time may come when you buy the same gadgets at lower prices and even at discounts.

Every Friday, government’s industry ministry announces the rate, at which prices in the country are rising. Last week the department of Statistics exploded a bomb shell when it announced that inflation has now reached to a killing level of 11.05 per cent and there is no hope in near future when it will be below double digits. It was a historic steepest jump of 230 basis points in just a week. Everybody including the government was flat with this steep hike of inflation.

Though headline inflation (ie combined inflation of all the three classes of commodities, which constitute our WPI) stood at 11.05 but the index of primary articles has actually declined by 0.4 per cent but real culprit was fuel, power, light and lubricants segments, which observed a rise of 7.8 per cent, which pushes entire inflation to a 13-year high.

Worldwide there are two barometers, which measure at what rates the prices of commodities are rising in the economies. The two are WPI and Consumer Price Index (CPI). Most of the major economies like US, UK, Japan, France, Singapore and even our arch rival China have selected CPI as its official barometer to weigh its inflation. But our country, India, is amongst few countries of the world, which selected WPI as its official scale to measure the inflation in the economy.

Though WPI is an old measure (1902) compared to CPI (1970), wholesale price index measures inflation at each stage of production while consumer price index measures inflation only at the final stage of production. WPI is often seen as a comfortable tool to take measure against price rise by the policy makers as it gives direction before the commodity actually hits the market. WPI is available on a weekly basis with as short possible time lag of two weeks. So headline inflation figure announced on June 20, 2008, of 11.05 per cent is actually of June 7, 2008.

Indian government constructed its present WPI way back in 1993-94 (1993-94 series replacing 1981-82 bases) by making a basket of 435 commodities (and not prices of services) whose price rise and fall tells us about inflation. Out of these 435 items, ’primary articles’ (food items and non-food items like jute etc) contributes 98 items, “fuel, power, light and lubricants” 19 items and “manufactured products” 318 items. Primary article has assigned a weight of 22.02 per cent, fuel, power, light and lubricants has been given weight of 14.23 per cent while manufactured products has been give a weight of highest 63.75 per cent.

What are the flaws of WPI :
  • The subscribed number of price quotation to be received for assessing changes in WPI is 1918 quotations, whereas Indian agencies responsible for calculating WPI receive not more than 1200 quotations. So price spread information is not even.

  • Out of 435 commodities, more than 100 commodities are ceased to be important from consumer point of view so the price changes in those 100 commodities does not really affect the Indian consumers.

  • There is a huge difference between the provisional and final index figure and it is sometimes more than 100 basis points difference between provisional figure and final figure. So for the week ended April 12, 2008, the provisional figure of inflation was 7.33, which were revised as final inflation figure of 7.95 so there was an upward difference of huge 62 basis points. In such a sensitive data an error margin of 62-100 basis points does not seem a healthy error.

  • WPI measures the general level of price changes at the level of either the wholesaler or at the producer and does not take into account retail margins. So WPI does not reflect the actual price hike, which the consumer is paying.

  • The importance of service sector can not be ruled out in India but service sector are not duly accounted in WPI. Service sector like health and education are important as consumers are increasingly spending more money on these items.

  • WPI essentially measures the price changes from the production side and not from the consumption side and hence it is a lop sided viewpoint of consumers.

Though WPI helps in understanding of the movement of prices worldwide, CPI is known as the best and most well known indicator of inflation. Time has come when Indian government should value the benefit of CPI vis-à-vis WPI.
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| 22 January 2010
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Our government is more worried about WPI index as it deals directly with the commodity producers, manufacturers, bulk sellers and market owners. To introduce CPI form of metrics, we have to deal with the sundry vendors, retailers to assess the market situation.Comparatively, WPI is the most easiest and accurate way of understanding prices from the statistical point of view. Once cannot go to every other shop and check the prices. That is why most of the commodities come up with the label Maximum Retail Price(Eg. biscuits, soaps etc). The retailer has to sell the item below the MRP specified by the manufacturer. This way, prices are controlled for most of the items at the retailer level but certain perishable goods will come under this category of price management. These perishable items are today in the hands of farmers, retailers and petty manufacturers. With globalization efforts, the government is trying to control this too by forming whole-sale stores, chain-stores like foodworld etc.I feel the WPI is the correct and easier way of judging the price movement as villages consititute the 80% of the country.
 
 
| 25 June 2008
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If we consider CPI as an index for Inflation, we will start competing with Vietnam having inflation @ 25.2%. In fact, the economic scenario of India is not far different then that of Vietnam. There also the asset bubble is created by Foreign funds in the name of Growth and here also it is the same. The only difference might be the amount of Black Money playing part in economic growth. It is unarguable fact that India's economy is being fuelled by black money (generated from terror, drugs, smuggling etc) besides foreign funds.
 
 
| 24 June 2008
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